Philips Electronics
NV's announcement that it will streamline its operations may not be enough to help it stem the worst semiconductor slump in decades.

On Friday, Europe's biggest consumer electronics company announced a reorganization of its internal structures in a bid to slash overheads. In a letter to Philips executives, Chief Executive Gerard Kleisterlee said finance, human resources and information technology were the areas targeted as they generate the bulk of the company's overhead. "This will give us an outlook on savings that go well beyond 300 million euros [$263.8 million]," he said.

The company's shares, which have dropped 18% since the start of the year, received a fillip from the news, climbing 2.3% to 31.97 euros. However, analysts say Philips needs to do more, suggesting it should shake up its semiconductor division by merging it with another company or risk losing even more ground to competitors.

The already jittery chip industry is being hit by a general downturn in the economy and a dramatic drop in consumer spending on electronics equipment following the terrorist attacks in the U.S. According to the Semiconductor Industry Association, sales of semiconductors have fallen 42% from $18 billion (20.51 billion euros) the previous year and show little sign of recovering until the second half of 2002.

For Philips, which has lost its place among the world's top 10 chip makers, the problem has been exacerbated because its chips are used in mature, low-growth consumer goods such as cordless phones and televisions. The Dutch company is being dwarfed by rival chip makers like
STMicroelectronics
NV of France, which have a bigger share of the market for high-growth products like digital, audio and car chips.

Bert Siebrand, electronics analyst at SNS Securities in Amsterdam, says the solution for Philips would be to merge its semiconductor unit with ST. This would help it to diversify its product mix and share the heavy cost of producing the new generation of chips. It would also help it to become the world's second-largest chip maker.

People familiar with the situation said Philips had no immediate plans to merge its semiconductor division with another company. However, they hinted that the two companies were cementing their ties, noting that Pasquale Pistorio, ST's chief executive, had periodic meetings with Arthur van der Poel, former chief executive of Philips Semiconductors, who now sits on Philips's management board.

Speaking to analysts last month, Mr. Pistorio said there were no plans to merge with Philips's semiconductor unit, though the companies already cooperate on some research-and-development projects. They are also splitting the 700 million euro price tag of a new cutting-edge chip-fabrication facility, which they will jointly operate. An ST spokesman Friday declined to comment any further.

In addition to reducing overheads, Philips, Europe's third-largest semiconductor maker, has said it will cut as many as 4,000 jobs during the second half of the year. Combined with the roughly 6,000 jobs it slashed in the first half, that would reduce its total work force by about 5% before the end of the year.

Last month, a 45% sales drop in its semiconductor division contributed to a third-quarter net loss at Philips. The company gave investors a glimmer of optimism when it said it had experienced a slight improvement in its semiconductor orders and expected fourth-quarter chip sales to improve.

However, Jan Hommen, chief financial officer, said that the temporary jump would be driven by a seasonable upturn over Christmas and that fourth-quarter revenue in the semiconductor division would still be 40% below the fourth quarter last year.